The effect of political institutions on the size of government spending in European Union member states and Croatia

Valentina Vučković, Institute for Development and International Relations, Zagreb, CroatiaMartina Basarac Sertić, Croatian Academy of Sciences and Arts, Zagreb, Croatia

AbstractThis paper presents an overview of theoretical and empirical research on the interaction between political institutions and economic variables. Using the dynamic panel model, the paper also investigates the indirect effects of electoral systems on the size of general government spending. The analysis is performed on a panel dataset of 26 countries (25 member states of the European Union and Croatia) for the period between 1995 and 2010. The results show that government fragmentation and political stability affect the dynamics of budgetary expenditures in line with theoretical assumptions. Regarding the implications of this research for Croatia, it has been shown that a higher degree of government fragmentation leads to an increase in government spending which is a significant result since Croatia has generally had some form of coalition government.

Keywords: political institutions; fiscal policy; electoral systems; government fragmentation; political competition; political stability